The Future of the Housing Market

The subprime mortgage crisis has extended itself throughout the economy. According
the Congress' Joint Economic Committee, some 3.7 million homes will probably
foreclose as a result of the crisis. As of August, according to their figures,
1.7 million of those homes have already foreclosed, and another 2 million are
expected during the next two years. Some of the largest names in the financial
industry are now subject to multiple lawsuits and are writing off tens of billions
of dollars as lost.

What is most fascinating about the subprime crisis' effect on the housing market,
however, is the economic geography of the market dynamics. Because so many of
the houses that were mortgaged with subprime loans are in the same neighborhoods
of various towns and cities across the country, the effect of the crisis has
not been spread equally across the nation's cities and towns. Instead, it has
left some cities, like New York City,
largely untouched, but literally created new ghettos of neighborhoods in the
cities hit hardest by the crisis, such as Cleveland, Ohio.

The short term future of the housing market looks grim. The Fed chief testified
to Congress on Nov. 8th, noting that the housing market will suffer the worst
of the consequences of the housing crisis from now until the end of 2008. During
that time, 450,000 subprime mortgages will reset at higher interest rates each
quarter. As the Chairman of the Federal Reserve, Professor Bernanke -
who used to head the Economics department at Princeton - put it, "Delinquencies
on these mortgages are likely to rise further in coming quarters as a sizable
number of recent-vintage subprime loans experience their first interest rate
resets... A sharp increase in foreclosed properties for sale could also weaken
the already struggling housing market and thus, potentially, the broader economy."

While some analysts are expecting the low mortgage rates - current 30-year
rates fell to just 6.24% this week - to help the housing market rebound
in the middle of 2008, that is treated by many, including the generally optimistic
Federal Reserve Board, as wishful thinking. It is, after all, hard to an envision
a scenario wherein the national real estate
market will recover while in the middle of the worst of the subprime crisis.

A more likely scenario will probably play itself out in the last quarter of
2009, when improved consumer sentiment and several additional rate cuts by the
federal reserve will have served to increase demand in the housing market sufficiently
to turn a nascent rebound into a steady increase in the value of the nation's
housing.

Nicholas Adams Judge is a freelance writer specializing in business, politics and economics. He holds a B.A. in political science and will begin his PhD studies in political economy and public opinion next fall. He has studied economics and political science at a number of different institutions, both here and in the U.K., including Amherst College, Warwick University, Oxford University and the University of Massachusetts-Amherst.